Active, Passive Or A Combination?

Once you know your asset allocation strategy (at High Rock we use a Wealth Forecast, prepared by our very capable Certified Financial Planning professional to discover your goals, time horizons and risk tolerance, which allows us to understand what the best strategy should be), then you can determine how you best want to execute it.

If you are a Do It Yourself (DIY) type, or perhaps an Assemble It Yourself (AIY) type, you best have a look at Larry Bates' book Beat The Bank first, there are lots of things in there that will assist and you can figure it out for yourself. 

If you think that you can beat the market (active investing), by all means have at it. Many have tried and, for a while they may have found themselves able to pick their spots to enter and exit, but sooner or later they fail, miserably.

Even the so called "experts" who manage the mutual funds that so many Canadians pay so dearly for (seriously friends, 2.5% MER?), with all the requisite degrees and training have serious difficulty in matching their benchmark index (of which they are expected to beat in order to justify their huge fees).

Last stat I saw, suggested that only about 20% are able to beat their benchmark target. It could well be lower this year!

Nonetheless, if you think it is daunting, as many do, and you do get rattled by market volatility, which may or may not invite you to question your entire strategy, there is some room for looking for and taking guidance from the pro's.

If your pro tells you that they can out-perform the market, you know that about 80% of them are telling you a tall tale. Remember, they also have to tell you (absolutely required by the regulators) that past performance is not a guarantee of future returns. There is a reason for that!

So there is a great reason to take a more passive approach, buy easy to understand, low MER, index Exchange Traded Funds (ETF's).

If you are starting out with a big chunk of cash, popping it into a bunch of ETF's may be a good idea, but if you are like me, you may not want to do it all at once. After 35 years in the trading/risk and investment business, I have come to recognize that there are times that buying makes good sense (usually when everyone else is selling and scared) and there are times when it does not (when everyone is throwing caution to the wind and complacent about risk).

Because all things economic are cyclical (see the above chart), there are times when stocks represent good value and times when they do not (i.e. they are expensive). Generally if stock prices (pale blue line) are at a point where they are lagging below earnings estimates for the future (dark blue line), they are of some potential value. That might be a reasonable time to get fully invested in that particular index ETF (in this case an S&P 500 ETF). If not, it might be time to wait.

Nobody who wanted to invest in 2016, wanted to wait until 2019 or 2020 to get to put money to work, so you can do some partial allocation in the meantime to a passive index (there were some opportunities available through this time period where a correction occurred and provided a better opportunity).

Point is, there is room for both passive investing and smart decisions about relative value, especially if you accumulate savings over certain time periods. If you blindly popped your money into the S&P 500 in January or August of this year, it may be quite some time before you will see it at those prices again. If you can live with that, great. However, most humans are emotional creatures, it is what gives us our humanity.

Pain is something that we find difficult to tolerate and pain is something we want to remedy very quickly. That is not good when it comes to investing and/or sticking to an investing strategy.

That is why some of us experts (Paul and myself anyway) choose to manage our money with a passive core in our portfolio, but also with some tactical and value oriented approach to it as well. We find that from a risk-adjusted perspective,  it tends to smooth out the bumps over the longer term. So that's how we invest our money and invite like minded folks to join us.